Abstract
We develop a dual-control method for approximating investment strategies in multidimensional financial markets with convex trading constraints. The method relies on a projection of the optimal solution to an (unconstrained) auxiliary problem to obtain a feasible and near-optimal solution to the original problem. We obtain lower and upper bounds on the optimal value function using convex duality methods. The gap between the bounds indicates the precision of the near-optimal solution. We illustrate the effectiveness of our method in a market with different trading constraints such as borrowing, short-sale constraints and non-traded assets. We also show that our method works well for state-dependent utility functions.
Original language | English |
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Pages (from-to) | 766-781 |
Number of pages | 16 |
Journal | European Journal of Operational Research |
Volume | 297 |
Issue number | 2 |
DOIs | |
Publication status | Published - 1 Mar 2022 |
Keywords
- Finance
- Convex duality
- Incomplete markets
- Stochastic optimal control
- Utility maximisation
- MONTE-CARLO METHOD
- OPTIMAL INVESTMENT
- OPTIMAL CONSUMPTION
- PORTFOLIO CHOICE
- INCOMPLETE MARKETS
- RANDOM ENDOWMENT
- HABIT FORMATION
- TIGHT BOUNDS
- DUALITY
- UTILITY